Adam Smith's Lost Legacy

Monday, October 31, 2016

WORTH A LOOK

"The Tragedy of the Commons: How Elinor Ostrom Solved one of Life’s Greatest Dilemmas

The design principles for solving the tragedy of the commons can be applied to groups"

Comment

I recommend David Wilson's post on Elinor Wilson's scientific work. It provides a thorough grounding in her path breaking solution to the theoretical case of Hardin's alleged 'Tragedy of the Commons', an influential paper he wrote - actually on population growth - a supposed isssue at the time - among environmentalists.

Wilson's account of the the influence of Elinor Wilson's work is most interesting, particularly in its practical applications afterwards.

MARKETS WORK BY VISIBLE PRICES

The Supposedly Nefarious Story of Intrigue Behind the American Airlines-US Airways Merger

Three years after the American Airlines-US Airways merger was approved, it's hard to look back and claim the deal hurt competition. Yet that's just what one recent piece of investigative journalism did.

The article also concludes that the merger has had the negative effects originally predicted by the DOJ, most notably, tacit (or even active) collusion between the airlines to restrict capacity and drive up fares.

The truth is quite different, though. While American Airlines and US Airways certainly lobbied on behalf of the deal, they also made significant concessions to address the DOJ's concerns….

… In November 2013, when the DOJ decided to settle the antitrust case, you could at least make a plausible argument that the merger would make it too easy for the big airlines to tacitly collude. Executives at American, Delta, United, and even Southwest have all talked about the industry's commitment to capacity discipline (i.e., slow enough growth that fares stay high).

After two years of declining airfares, it's pretty clear that airlines don't have much pricing power and aren't colluding to drive up prices. …

… This is a textbook example of Adam Smith's "invisible hand" at work. Airline executives all wanted to keep fares high -- yet in their efforts to maximize their earnings, they ended up driving fares lower, helping consumers.”

COMMENT

Very Interesting article about how markets work. Some participants may want to raise VISIBLE prices by expensive mergers of the big players and act accordingly. Other participants for other reasons may want a major component price in aviation - VISIBLE fuel costs - to fall for disconnected reasons - a major player (Saudi Arabia) in the quasi-monopoly called OPEC - decides to raise output that lowers VISIBLE prices of oil - and is so influential that VISIBLE prices do fall.

What then does the ao-called, mythical metaphor of “an invisible hand”, falsely attributed to the wholly innocent Adam Smith (1723-90), have to do with this explainable phenomenon?

Answers: Nothing!

There is nothing invisible in visible prices. That is how markets work, through VISIBLE prices. They cannot work without them.

Saturday, October 29, 2016

ADAM SMITH IS INNOCENT OF MODERN ERRORS OF ATTRIBUTION

Charles Franklin posts (29 October) on Small Businss Trends about a new book by Georgia L. Keohane, Executive Director of the Pershing Square Foundation and a professor at Columbia University HERE

“Innovative Finance Provides the Link Between Capital and the Common Good"

“The philosophy behind the book’s belief in the power of finance stems from the concept of the”visible hand”, a market-based approach that addresses failures with the highly regarded economic principle known as the”invisible hand.” As the book points out, unchecked belief in the “invisible hand” can lead to negative social and environmental consequences. This market failure, however, can be uniquely solved by innovative finance because of the creativity and scale of the finance industry.

To give an example, childhood vaccines are critical in the fight against fatal childhood diseases but are often neglected by interested businesses because of financial risk and concerns for safety. Pharmaceutical companies, like many donors, want to know that their investment will be financially and socially effective. Capital and the Common Good turns these concerns into a question. What if, in addition to grants and donations, vaccines were funded by long-term passive income (such as interest from a low-interest loan, bond or premium payments from micro-insurance customers)?

The answers to this one “What if” question is a book-length journey into the world of innovative finance, where social problems are solved with the creativity and scale of the market’s “invisible hand.”

COMMENT

I wish Georgia Keohane well in her endeavours. I also hope she takes some time to investigate the so-calleded “higly regarded principle” (by whom and where did they get it from?). It certainly did not come from Adam Smith - check it out.

Smith’s example was of a merchant who preferred to invest locally because he did not trust strangers overseas of whom he knew nothing about their probity, or the reliability of their legal systems. His decision had intentional consequences - he added to his feelings of security and earned profits. His motivated intentional actions of investing locally also had unintentional consequences in that he also added his capital to “domestic capital and domestic employment”. These unintended consequences were also public benefits.

However, Adam Smith also wrote many times of the motivated actions by “Merchants and Manufacturers” that also had intentional consequences, but which did not lead to unintended beneficial consequences, such as those Merchants and Manufacters, who pressed governments to impose tariffs on imports to reduce competition, so that they could put up prices.

The distinction in the two exmples is important. Modern economists enhance Adam Smith’s first example of ‘an invisible hand’ leading the merchant unintentionally to cause public benefits into a general ‘law’ that the invisible hand benefits society.

But that is not what Smith said and the example of merchants clamouring (as they do) for import controls to reduce domestic competition and raise domestic prices does not benefit society. It can lead to political tensions between countries, even trade wars, and, in the 18th century to colonial land grabs and inter-European wars.

In the common examples of naval wars and colonial tensions there is no role for a metaphoric benign invisible hand.

Paul Samuelson, the modern economist, went further in 1948; he generalised the ‘invisible hand’ to be about the selfish actions of people in markets that led to social benefits all round. And he attributed this assertion erroneously to Adam Smith, which attribution to Adam Smith stuck in the minds of modern economists, such was the credibility of Samuelson among his 5 million readers because of his credibility as a mathematical genius, for which he won the Nobel Prize.

Georgia Keohane has chance to correct the errors of Samuelson and the majority of modern economists who believe in the myth of the ‘invisible hand’ and associate it with Adam Smith, a wholly innocent victim of their errors of attribution.

Adam Smith's Metaphoric "invisible hand" and the Mythical Invisible Hand of Modern Economists

The Death of the Invisible Hand: Why the Narrow Pursuit of Self Interest Always Fails. Regulation comes naturally for small human groups but must be constructed for large human groups.”

“New theories are not good enough, however. We also need to change the metaphors that guide behavior in everyday life to avoid the disastrous consequences of our current metaphor-guided behaviors. That is why the metaphor of the invisible hand should be declared dead. Let there be no more talk of unfettered competition as a moral virtue. Cooperative social life requires regulation. Regulation comes naturally for small human groups but must be constructed for large human groups. Some forms of regulation will work well and others will work poorly. We can argue at length about smart vs. dumb regulation but the concept of no regulation should be forever laid to rest.”

COMMENT

David Sloan Wilson is on the right track (metaphor) but his focus in on modern versions of an 18th-century metaphor, whereas modern versions have been misattributed to Adam Smith (1776), who used the metaphor quite differently from that which Paul Samuelson’s (1948) invented version wrongly asserted to be Smith’s.

In fact, today’s words “an invisible hand” have no metaphoric value in modern times - they are used by modern economists as an actual entity (though it does not exist!). Metaphors do not exist materially. See Adam Smith on metaphors in his “Lectures on Rhetoric and Belles Lettres” (1762-3), as taught by him from 1748 to 1764. Also check the Oxford English Dictionary’s entry.

Moreover, there is no real connection between Adam Smith’s use of “an invisible hand” as a metaphor in “Wealth of Nations” (1776) and such modern attributions as it being about “the market”, “supply and demand”, “economic equilibrium”, “Pareto’s theorems” “general equilibrium”, “consumer utility”. “economic growth” and scores of other attributions presented in the daily media - it has even become common in political discourse, especially in dictatorships and for the secret misuse of political power.

Metaphors do not “Guide” actions, they describe in an interestng manner, for example as in Adam Smith’s brilliant metaphor of the “Daedallian wings” of paper money compared to that of solid gold (Wealth of Nations). The metaphor’s meaning is in the use of the words in their context.

Adam Smith was not in favour of “unfettered competition” (David Sloan should know that). Smith was unimpressed with the competitive qualities of actual “merchants and manufacturers” who favoured, lobbied, bribed, and otherwise induced governments to curtail imports, even to ban them outright (“Jealousy of trade”), to reduce competition and thereby raise prices.

Smith never hinted at support for “no regulation”, as he makes clear in Wealth of Nations.

Samuelson, a brilliant mathematician (worthy of the title of mathematical genius) started off the wildest goose chase (metaphor!) by his incorrect attribution, to Smith's 'invisible hand', which was picked up by the 5 million readers of his textbook, many of whom became economists (including myself), media commentators, and politicians, and now Samuelson’s error is reproduced in stone (metaphor!) across the world’s media.

My Blog: www.adamsmithslostlegacy.blogspot.co.uk has campaigned against Samuelsons’ mistaken version of Adam Smith’s use of the IH metaphor since 2005. There are faint signs that the message is getting across. I prefer David Sloan Wilson to join that campaign and not “throw out the baby with the bath water” (metaphor!) in attacking a wholly innocent Adam Smith.

“Trade is the dimension that gets the most press, for it is the short-term dimension of GDP numbers and current economic activity; but complexity is far and away the more important dimension for it is the long-term dimension of progress and innovation — the dimension that both, makes an economy more interesting and diverse, and increases the economy’s international competitiveness, all through the work of the “Invisible Hand”…

…Trade is the dimension that gets the most press, for it is the short-term dimension of GDP numbers and current economic activity; but complexity is far and away the more important dimension for it is the long-term dimension of progress and innovation — the dimension that both, makes an economy more interesting and diverse, and increases the economy’s international competitiveness, all through the work of the “Invisible Hand”…

Invisible Hand

Anyone who has studied even a little bit of economics will have learnt early on that free markets are driven by the competitive forces of supply and demand. In 1776 Scottish Philosopher Adam Smith, the so-called “Father of Economics”, published “An Inquiry into the Nature and Causes of the Wealth of Nations”. In this classic work Smith told us how the most efficient economies are the one which self-organize themselves; pulled, as if by an “invisible hand”, to the optimal economic equilibrium by the competitive forces of supply and demand. Despite the brilliance of this inspired work, and the work of many other great economists over the last two and half centuries, economics is still often considered more art than science!…

…Adam Smith and the Invisible Hand of Innovation

In their simplest form, free markets ensure that competition among producers will bring forth the lowest price (at given quantity) for consumers, and similarly competition among the consumers will bring forth the highest price (at given quantity) for producers. Thus, in its simplest form, a free market will self-organize a balancing equilibrium between supply and demand and, in so doing, thus brings forth the best available price for both buyers and sellers.

But the real juice of free markets is not in its ability to identify “the best equilibrium price” but its motivation towards productivity and innovation. In free markets, it is the “competition of ideas” that ultimately spurs “innovation” (in both products and production); which, as Adam Smith identified, acts like an “invisible hand” to the benefit of society as a whole! …

…

When Adam Smith described the economy as a naturally self-organizing system, he was essentially talking about the complexity dimension of a Complex Adaptive System. And when he talked about an invisible hand, what he had essentially identified was that individuals acting in their own self-interest adapt to each other, and, in so doing, the economy as a whole self-organizes itself away from a thermal economic equilibrium to a more structural, more complex economic equilibrium.

In the concept and use of the phase “invisible hand”, Adam Smith had essentially identified how structure and complexity emerges and grows in the “Complex Adaptive Economy” (CAE). …

…The economy is a Complex Adaptive System (CAS) and the “Micro-economics” of this CAS operates in 2 different dimensions, that are normally confused as being one and the same!

In micro-economics, equilibrium is fundamentally a 2-dimensional space. Trade is one dimension, the economy (or more accurately economic structural complexity) is the other. When Adam Smith talked about the “Invisible Hand”, what he was really talking about was the complexity dimension; how in a CAE some form of “Invisible Hand” guides the “micro-economic structure” of the economy to an ever more complex economic equilibrium…

Economics is often considered the “Dismay Science” because of its enduring focus on the competition for scarce resources. But the progression away from this most basic of economic equilibriums – to more complex economic equilibrium structures – first occurred, and continues to occur, when innovation “replaces” direct competition…

Complexity Theory shows that the “Invisible Hand” is more about competitive and complementary innovation, than competitive fighting over scarce resources. A CAE is a driven-damped system; driven by innovation and damped by natural entropic decay.

In this driven-damped system it is the constant “interplay” – of diversification and integration, of upheaval and rejuvenation, repeated over and over, at every level of scale – that acts like “an invisible hand” both driving and fine-tuning Spontaneous Economic Self-Organization and the Emergence of Every Greater Economic Progress and Complexity!

And so it would appear that Complexity Theory applied to the CAE confirms what Adam Smith suggested back in 1776 “Free Markets and Competition lead to Innovation at the Cheapest Possible Price to the Benefit of All”.

But, as serendipitous as all this might seem, this natural unfolding of a bountiful economy still relies heavily on the “efficient” guidance of the invisible hand – but unfortunately efficiency is not always guaranteed!

COMMENT

Kieran Kelly writes an original article, of which my extracts above focus on what I know about that which he writes. I refer to his several references his version of what Adam Smith’s singular use of “an invisible hand” as a metaphor.

Kieran Kelly may not know that what is known today as “the invisible hand”, also mistakenly credited to Adam Smith, along with Kieran’s later description of “like an invisible hand” (a simile), and, later still, as a “phase” (‘phrase’?), were not what Adam Smith (a very precise writer) intended or meant.

However, Kieran Kelly’s essay is most interesting, especially the last paragraph which I quoted above.

The clue to my objections is summarised in his first quoted paragraph: “all through the work of the “Invisible Hand”. For Smith it was a metaphor, not an entity. Its use by Smith was rhetorical, not descriptive of an event. Adam Smith lectured on Rhetoric for a longer time that he lectured on any other subject (1748-63) (See: Adam Smith: Lectures on Rhetoric and Belles Lettres (1762-3) OUP 1983). Rhetorical speech was important for Smith.

I shall return to Kieran Kelly’s essay in due course.

Much as I admire Adam Smith’s Works, the accolade “Father of Economics” is a modern label often used by people who have not read his Works or those by Smith’s predecessors or contemporaries, but who apparently wish to give the impression of how well informed they are. Smith was an outstanding scholar among others and who, like Newton, he stood on their shoulders (a metaphoric statement).

The modern myths of Smith’s use of the metaphor of an ‘invisible hand’ now dominates in economics and are largely due to Paul Samuelson, an outstanding contributor to mathematical economics, whose prestige as the author of a most successful textbook, Economics, 1948 and 19 editions, that dominated Economics 101 teaching for over 50 years (including during my undergraduate years 1965-69), and misled the generations with the erroneous assertion that Adam Smith said that ‘selfish’ motivated consumers were “led by an invisible hand to contribute to the public good”. This myth is now firmly embedded in economic theory and worse, in public discourse, despite it being manifestly untrue.

Now that Kieran Kelly has integrated the myth of Adam Smith’s use of the “invisible hand” metaphor into the mathematics of complexity, no doubt the longevity of the myth will continue having being given new credibility from an impressive new application.

Thursday, October 27, 2016

ADAM SMITH AND SLAVERY

“Slaves were plentiful in Adam Smith's time. With all the emphasis on labor as the source of all riches, he does not mention slaves.

Slaves were plentiful in Adam Smith’s* time. Irish slaves were in greater number than African slaves in North America. Plain English poor people were forced to indenture themselves as servants for years on end. With all the emphasis on labor as the source of all riches, he does not mention slaves. Best ignored, lest people begin thinking about the vast amount of customers lost to every business since slaves of all origins had no wherewithal to buy anything. (* I am rereading Adam Smith, the 17th century author of “...On The Wealth Of Nations,” truly difficult to read – needs be studied, no alternative. Cliff Notes help. )

In the 1600s mercantilism reigned, another mind-restricted concept claiming it is the government’s income that must be maximized if the country is to be great (a noise-word again heard these days). Yea, “great,” as in lots of guns, at the expense of butter and all else. Yea, “great,” in A.S.’s days the great ability to kill competitors using young soldiers before people die off at an average age of 35. “Great,” as in lots to be afraid of. It took an Industrial Revolution to increase life length a bit, and a social revolution led by our own youth in the 1960s to make. society wise up to “great.” In part. Temporarily. Tentatively.”

The root of all evil is money! A truism from ancient days. ‘Tis time to recognize its message and modify its impact.

COMMENT

I was drawn to Harry Shamir’s post by its opening paragraph where he makes a clear assertion that Smith “does not mention slaves”. How true is Harry’s assertion?

Not very true at all. In fact it is quite untrue:

In Smith’s Wealth of Nations (1776) he discusses slavery 12 times. In his Lectures on Jurisprudence (1762-3) Smith mentions slavery 38 times. In his Theory of Moral Sentiments (1759) he mentions slavey once.

Whereas slaves had no money, and they remained slaves for life and their labour was unpaid (though it cost the slave masters their low subsistence), indentured people did have some little money from agreeing to be indentured for a fixed term of years.

Smith never visited the America’s nor had he knowledge of the slavery of Africans, nor how it matched that of the numbers of indentured Irish (or Scottish/Welsh/English) people. Slavery was illegal in Scotland - indenture wasn’t.

Smith was a leading critic of ‘mercantalism’ and colonialism (see Wealth of Nations, Books III and IV), and the wars they created.

The ‘industrial Revolution’ was a 19th century phenomenon in Britain - that is after Smith had died in 1790. It was named as such and then backdated to the 1760s, though neither Smith and others noticed the phenomenon. Smith did notice and criticise the prevalance of Europen wars, much of it over trade and colonies.

Smith lived and wrote in the 18th century, not the 17th century.

I suggest that Harry carries on with his reading of Adam Smith.

By the way: "The root of all evil is money!" says Harry. In fact the CORRECT saying is: "The love of money is the root of all evil".

“Avent is right about one thing: The economic and social institutions that once maintained social and political harmony by ensuring that wealth was fairly distributed are no longer working. Just as with the Industrial Revolution, he writes, it will take a “period of wrenching political change” before new institutions will emerge. It is not enough, he warns, to simply leave it to the “invisible hand” to work out the new arrangements, for as we’ve learned in recent years, the invisible hand turns out to be nothing more than “the thudding fist of the powerful.”

The invisible hand, of course, is Adam Smith’s original formulation of the unintended positive collective outcomes, based on intentional private actions. My use of the term here is referring to anything but positive collective outcomes. In short, I am employing irony. I make that clear here because it is easy to misinterpret. And Pakistan’s invisible hand mafia’s principal expertise is to work for the benefit of the few, at the expense of the many. In this way, it is the reciprocal equivalent of Adam Smith’s invisible hand. Hence, invisible hand mafia.

COMMENT

Congratulations to Mosharraf Zaidl for getting Adam Smith's meaning correct when he used the metaphor of "an visible hand".

Monday, October 24, 2016

WORTH THINKING ABOUT

It’s time to rethink the role that government plays in shaping and supporting policies to solve big problems like climate change and income inequality.

Despite healthy corporate earnings, an employment rate that has slowly rebounded since the financial crisis of 2008, and the outpouring of high-tech distractions from Silicon Valley, many people have an aching sense that there is something deeply wrong with the economy. Slow productivity growth is stunting their financial opportunities; high levels of income inequality in the United States and Europe are fueling public outrage and frustration in those left behind, leading to unprecedentedly angry politics; and yet despite the obvious symptoms, economists and other policy makers have been largely befuddled in explaining the causes and, even more important, the cures for these problems.

That’s the starting point for Rethinking Capitalism. A series of essays by authors including Joseph Stiglitz, an economist at Columbia University who won a Nobel Prize in 2001, and Mariana Mazzucato, a professor of the economics of innovation at the University of Sussex and a rising voice in British politics, the book attempts to provide, as explained in its introduction, “a much better understanding of how modern capitalism works—and why in key ways it now doesn’t.” Together, the essays provide a compelling argument that we need more coherent and deliberate strategic planning in tackling our economic problems, especially in finding more effective ways to reduce greenhouse-gas emissions. …

In particular, Mazzucato, who also co-edited the book and co-wrote an introduction with Michael Jacobs, wants to counter the view that free markets inevitably lead to desirable outcomes and that freer markets are always better: the faith that “the ‘invisible hand’ of the market knows best.” In fact, she argues, we should admit that markets are created and shaped by government policies, including government support of innovation.

There is nothing too contentious in that statement, but she extends the argument in a way that is controversial. Not only is it the responsibility of governments to facilitate innovation, which she calls “the driving force behind economic growth and development,” but the state should also set its direction; the trajectory of innovation needs to be guided by policies to solve specific problems, whether the aim is increasing productivity or creating a green-energy transition. Mazzucato writes that innovation needs both “well-funded public research and development institutions and strong industrial policies.”

Industrial policies—or what ­Mazzucato sometimes calls mission-­oriented public policies—have a long and divisive history. Economists define industrial policy in a very specific way: it’s when governments set out to play a deliberate role in directing innovation and growth to achieve a desired objective. Her call for the revival of such policies counters the idea that has held sway for decades among many politicians, particularly in the United States and the U.K., that government is better off not trying to assert a role in steering innovation. She writes that governments should not only try to “level the playing field, as orthodox view would allow.” Rather, “they can help tilt the playing field towards the achievement of publicly chosen goals.”

For them to do so, ­Mazzucato said, “the whole framework needs to change.” The belief that the government should only intervene to “fix” the market in extreme circumstances, rather than acting as a partner in creating and shaping markets, means we’re constantly putting “bandages” on problems and “nothing changes.” The intractability of today’s slow growth and widening inequality can be traced, she says, to the fact that governments in the U.S. and Europe have increasingly shied away from their responsibilities. “We have to admit that policy steers innovation and growth, and so the question is where do we want to steer them?” …

The stimulus energy investments were “a bit of a disaster,” says Josh Lerner, a professor at Harvard Business School. “A lot of the problem was in the ways they were implemented. They violated all the rules of how these things should be done.” Not only did the government make large bets on a few companies, in effect picking winners, but it did so without clear rules and criteria for the choices. And, says Lerner, “the selection of the battery and solar companies was extremely opaque. A lot of it seemingly came down to if you had a former assistant secretary of energy doing the lobbying for you.” …

Still, Lerner is not dismissive of government interventions to support green-energy innovation. “You can make the case that the need is greater than ever. A well-designed program would potentially make a lot of sense at this point.” But, he says, “experience tells us there are more misses than hits” with such government interventions. And he suggests that such programs often fail because their creators are not familiar enough with any given technology and its business. “The decisions might seem plausible, but they turn out to be unproductive. The devil is in the details.” …

Even some of the stimulus’s greatest apparent successes now seem to be less effective than originally hoped. ­Steven Chu, a Nobel Prize–­winning physicist, was named secretary of the Department of Energy in early 2009 and implemented many of the bill’s most ambitious efforts to boost energy R&D. It funded large increases in energy research, and Chu created a series of well-conceived centers and initiatives, including the Joint Center for Artificial Photosynthesis and ARPA-E, a program to support early-stage energy technologies. But in subsequent years, budget cutbacks and political pressure took their toll on these projects, which needed patience and consistent funding. As a result, ambitious research and technology initiatives are now ghosts of their once high-profile selves.

The outcome makes one wonder just how such policy initiatives, which include investments in research and engineering projects that require years to bear fruit, will ever survive the constantly changing political moods and government leadership. Creating a rigorous industrial policy to encourage green technologies is no doubt a worthwhile objective. Economists and the lessons from efforts like the stimulus bill can teach us how to design such policies to be robust and effective.

SENSE AND SENSIBILITY no 2

“The Theory of Moral Sentiments (TMS, 1759) concerns human sentiment as the source of the rules we follow that accounts for our sociality. It also provides a unique framework for analyzing and modelling decisions in two-person games such as “trust” games. Neo-classical economic (game) theory failed to predict action in these experiments in the 1990s. If we had known and applied Adam Smith’s model based on mutual fellow-feeling these results would not have been unexpected. I will use propositions from TMS to show why, and indicate how, Smith’s model was more appropriate for explaining/predicting these results than the traditional neo-classical (and game-theoretic) models that displaced—rather than supplemented—his model.

Smith sees individuals as simultaneously self-interested and highly social. Our sociability takes the form of learning to “humble the arrogance of our self-love and bring it down to what others will go along with.” Common knowledge that individuals are self-interested is necessary in Smith’s model for people to know who benefits and who is hurt by an action, and is essential in learning social competence through processes that punish intentionally hurtful acts and reward intentionally beneficial acts. Out of such consent processes emerge ancient rules of morality in which propriety governs virtues like trust and trustworthiness. In the larger civil order these rules of propriety become the basis for a broad conception of property, as rights to take action without reprisal applied to both possessions and contracts. In that extended order of markets our sociability enters axiomatically in the form of our “propensity to truck, barter and exchange.” This propensity, combined with third party enforcement of property—a natural extension of the practiced cultural rules of conduct—enables self-interested action among strangers to create wealth through specialization.

Hence, Adam Smith provides a seamless account of other-regarding behavior in our more intimate social groups, setting the stage for our pursuit of specialization in the extended order of impersonal markets.”

COMMENT

SOME YEARS AGO WHEN I WAS ABLE PHYSICALLY TO ATTEND INTERNATIONAL GATHERINGS OF ADAN SMITH SCHOLARS, VERNON SMITH STOOD OUT AS AN EXCEPTIONALLY CLEAR EXPONENT OF ADAM SMITH'S WORKS AND MODERN RELEVANCE.

IT IS A PLEASURE TO INCLUDE AN EXTRACT OF VERNON SMITH'S THINKING AND EXPOSITION OF THE WORK AND IDEAS OF ADAM SMITH ON MY NEW COLUMN.

Sunday, October 23, 2016

BEST NOT TO IGNORE GOOD ADVICE

FROM AN UNPUBLISHED PAPER OF MINE in 2008:

“Introduction

"At the 40th Annual Conference of the UK History of Economic Thought, held in Edinburgh in September 2008, when I presented a paper, “Adam Smith’s Invisible Hand: from metaphor to myth” (later, I re-wrote the paper, keeping the title), it was my first acquaintance with most of the international HET scholars in attendance. Most of those who contributed to the session’s discussion that followed were largely critical of my paper for several reasons.

However, Professor Mary Morgan (LSE) afterwards gave me some valuable advice privately on how to criticise widely accepted ideas to scholarly audiences, of which advice I took note.

My paper, she pointed out, did not open with a statement about the various ways in which modern economists use the invisible hand metaphor and, in consequence, it was not clear, she suggested, exactly to what I was objecting, other than my assertion that Adam Smith did not mean the invisible hand to be treated other than as a metaphor.

She asked if was I criticising the theory that an invisible hand guiding self-interested, even selfish, actions, whatever the intentions of the actors, produced benign outcomes? Or was I denying that the invisible hand was a mechanism that operated in markets, through prices and supply and demand? Making this clear, she advised, would guide listeners to the point I was making.

A theory, she added, can always be tested to decide if it corresponds to, or explains, experience. For example, the claim that Adam Smith believed that “self-interested” – even “selfish – behaviours” led to “public benefits” could be tested by specific instances where this was or was not evident in practice. It could also be contrasted with my claim that because Adam Smith refers in Books 1, 2, and 3 of Wealth Of Nations to over 80 instances where the selfish/self interested behaviours of individuals had malign consequences for those affected rather than leading to private, not public, benefits, as claimed for modern versions of the “invisible-hand”.2

On reflection later, I accepted Professor Morgan’s objective advice (she did not indicate whether she agreed or otherwise with me on the invisible hand).

However, since that conversation, I have tried to be wary of ignoring her advice. If readers were left in the dark about the significance of what I have been trying to say since 2005, I would merely be having conversations with myself."

COMMENT

I was looking through my files of my previous writings on the “invisible hand” and among them I noted the above paragraphs of a most relevant and interesting account of my response to Professor Mary Morgan’s (London School of Economics) advice.

It is a timely reminder as I commence writing my 3rd book on Adam Smith (details will be released in due course). I shall, of course, also apply Professor Morgan’s advice to my general writing on my Blog: - (www.adamsmithslostlegacy.blogspot.co.uk).

Looking through recent items, I sometimes descend to mockery of the writings on the “invisible hand’ in the public media, if only from my exasperation…

VISIBLE PRICES ENABLE MARKETS TO WORK

“Stock indexes closed mostly lower on Friday as the telecom sector bore the brunt of selling. The S&P 500 was also lower on the day, but pulled off a one point gain on the week, while the Nasdaq ended 0.6% higher for the week.

Eastman Chemical Co. (NYSE:EMN) closed at $66.87 after seeing 1385388 shares trade hands during the most recent session. This represents a change of 0.78% from the opening.

The closing price represents the final price that a stock is traded for on a trading day. It’s the most up-to-date valuation until trading begins again on the next day. However, most financial instruments are traded after hours, which means that the the closing price of a stock might not match the after-hours price. Regardless, closing prices are a useful tool that investors use to quantify changes in stock prices over time. The closing prices are compared day-by-day to look for trends and can measure market sentiment for any security over the course of a trading day.

Stock exchanges work according to the invisible hand of supply and demand, which determines the price where stocks are bought and sold. No trade can occur until someone is willing to sell a stock at a price that another is willing to buy it at. When there are more buyers than sellers, the stock price will rise because of the increased demand. Conversely, if more individuals are selling a stock, the price will decrease.”

COMMENT

A VERY CLEAR ARTICLE EXPLAINING AN ON-GOING MARKET PROCESS BY MEANS OF VISIBLE PRICES.

Every student from ECON 101 understands this. Every participant in a market knows this - they can look at current VISIBLE prices and can make a judgement: do they want to stick or twist (metaphor alert!).

Professional market watchers follow VISIBLE price trends and can follow their clients instructions or can act on their own judgements wthin their skill sets both within or outwith ‘office hours”. Newspapers and emails scan VISIBLE prices to which market investors can choose to act or get somebody else to act for them.

That is how markets work using the VISIBILITY or prices and their possible movements. Even computer programs that track VISIBLE prices and can initiate action or inaction to buy or sell in a market.

There is absolutely no role for the metaphor of “an invisible hand” and Adam Smith wrote nothing to say there was such a real entity at work.

He used the metaphor to help to describe how the motivated actions of a particular merchant (what today we would call his ‘risk aversion’) caused him to invest locally and in doing so he added his capital to ‘domestic revenue and employment’. This consequence of his intentional local investment happened unintentionally to benefit the public good.

Likewise, Smith noted on multiple occasions in his Wealth of Nations how the motivated intentional actions of other merchants could be a disbenefit to the public good, such as when merchants clamoured for the government to restrict imports - even ban them altogether - which intentionally restricted compertition and intentionally raised domestic prices and their profits. And, of course, lowered the profits of other merchants.

Friday, October 21, 2016

ONE STEP FORWARD, TWO STEPS BACK

"Sugar, rum, and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation."

Adam Smith, of course, was the original free-market economist, the man who coined the expression "Invisible Hand" for the free-market forces created by the individual pursuit of self-interest. It is ironic, therefore, and possibly the latest indictment of our education system, that alleged conservatives today condemn the proposed excise tax on sugary drinks in Boulder as an improper intrusion by government on free choice.

COMMENT

Interesting editorial and link to Adam Smith on taxing sugary drinks.

It is spoiled by linking Adam Smith to a modern version of him ‘coining the expression’ of the ‘invisible hand’. He didn’t, of course. ‘coin’ the metaphor of an “invisble hand’. That metaphor/expression has a much longer history than Smith’s lifetime (for instance, such as by William Shakespeare in MacBeth, and scores of theological instances).

Moreover, individual self-interest could also create import prohibitions, and/or high tariffs, curbing “free-market forces”. Smith’s use more nuanced than the Daily Camera appears to realise - and Adam Smith said so in Wealth of Nations many times.

But congratulations to the Daily Camera editorial for drawing attention to the pontentional taxability of sugary drinks, as a health measure.

Thursday, October 20, 2016

LOONY TUNES no. 181

In 1953, Milton Friedman wrote out what have been the guiding principles of modern, orthodox economics that were necessary should it wish to join the ranks of serious science. In his Methodology of Positive Economics, Friedman recognized economics unlike harder sciences proceeds from an enormous disadvantage, meaning that for the most part, all of it is unobservable. We know that an economy happens and that there are observable conditions that relate to the immense and complicated interactions that make up any economic system, but to figure out exactly how A becomes B is all but impossible. You and I may arrive at the same place, economically or financially speaking, but the way in which we did might be extremely different and that might be important.

This was, of course, Adam Smith's "invisible hand" of free market economies where social progress was a product of mutual interdependence. But economists of the post-Great Depression era were concerned that because so much was invisible, leaving it up to markets alone was too messy and far too often violent. Many, like Friedman, were actually concerned that without a more central role for someone (it was only human that economists saw themselves in that role) that free markets altogether would be subsumed by raw statism, as so many other places had already experienced. To them, to save it was to corrupt it.

Kathleen Hartnett White, distinguished senior fellow-in-residence and director of the Armstrong Center for Energy & the Environment at the Texas Public Policy Foundation and former chairman of the Texas Commission on Environmental Quality. Also co-author of the new book Fueling Freedom: Exposing the Mad War on Energy (Regnery, 2016).

“Determined, free, creative, courageous men and women -- exemplified throughout the Midland community -- have achieved what seven presidents promised but failed to achieve: energy independence as an option. The shale revolution is a result of the Permian rock and the people making thousands of individual decisions in pursuit of profit within a competitive market. It looks like Adam Smith’s “invisible hand” -- the free market -- has also replaced the autocratic bullies of OPEC without so much as a single skirmish. “

“Some economists point to Adam Smith’s long-held theory that the invisible hand of the global market place should allow labor and raw materials to move wherever they will be used to maximum benefit. In short, open borders and free trade. That’s the theory.

But in the United States, Smith’s invisible hand is smacking labor upside the head.”

COMMENT

I have a long standing commitment on Lost Legacy to only comment on the politics of the country I vote in (Scotland) and the above quote is from a political column in a USA newspaper. Nothing I assert may be taken as an endorsement or criticism of the politics of Betsy McCaughey or the New York Post. I am solely interested in the demonstrated economic illiteracy regarding Adam Smith’s legacy.

“Oliver Hart and Bengt Holmström, who won the Nobel Prize in Economics (or to be precise, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) this year for their work on Contract Theory are part of an important line of research in microeconomics that has patiently tried to open up the black-box of how the economic institutions that underpin that grand abstraction called the “invisible hand of the market” actually works.”

Tadeusz Szuba proposed a theory – that Adam Smith’s Invisible Hand metaphor is an occurring phenomenon that can be formalized, simulated and most probably used to propose all-new tools to analyze and predict markets in the future.

The proposed theory claims that the Invisible Hand is a symptom of the existence of another dimension of a market, which is of computational nature. A market and its agents are unaware of this, because only piece(s), or result(s) of this symptom can be observed. In this dimension, the nature of a market and agents creates a complete, programmable computer on the platform of brains of agents and the physical structure of the market. This computer is self-programming and since it exists and functions on the platform of market agents’ brains, results of computations are outputted via the brains of agents and represent themselves as the behavior of a market. These computations are chaotic, distributed, parallel, and non-continuous, with interleaving threads of different computations.

These computations are driven by:

1abstract value assigned to objects and services

2calculations and logic inferences.

What is fundamental for the emergence of this computational dimension, is that market agents are able to assign value to objects, services and actions, are able to build in consciously chains of inferences, and are able to convert conclusions into business actions.

According to this theory, the Invisible Hand is much more powerful and universal than Adam Smith and contemporary economists even expected. The Invisible Hand performs market control on several levels: in terms of production and consumption (equilibrium optimization); in terms of new discoveries (technical market optimization); in terms of social behavior (social market optimization), such as modifying and discovering new rules of market behavior. It is expected that this discovery may lead to the creation of all-new tools and models for market analysis and prediction, compared with today’s macroeconomic models.[27]

COMMENT

A leap into ever more complex theory for a phenomenon that does not exists as it is based on a rhetorical metaphor from language, not

“The fact is that the ACA is both unconstitutional and unworkable. It cannot be successfully reformed because it attempts to substitute central planning for the invisible hand of the free market, as if a handful of politicians and bureaucrats in Washington could possibly micromanage the healthcare of 320 million people to everyone’s satisfaction. Now, as in 2010, the only genuine solution for it is repeal.”

“Despite the deluge of headlines it generated, there was actually nothing unusual about the process of a supermarket haggling with its supplier over prices

“When we sort ourselves in this instinctive way, the average wait for everyone is lower and customers are processed as efficiently as possible. There’s no need for any complex calculations or centralised co-ordination. By doing what’s right for ourselves we help everyone. This is Adam Smith’s “invisible hand” in action.

And that is how we often conceptualise markets. As consumers we respond to changes in prices and supply responds to shifts in demand. It all happens naturally and fluidly, creating a kind of spontaneous order. Yet, while it is true that markets can sometimes work in that almost magical textbook way, more often than not they don’t.”

“The phrase “invisible hand” was coined by Adam Smith in the book ‘The Wealth of Nations’. The theory behind this very popular phrase is that there are unintended social benefits to individual actions. The invisible hand theory has evolved and was turned to public policy formulation as a strategic means for intending social benefit. Balancing control, promoting business interest and ultimately attaining social benefits have been at the forefront of National Development objectives.

The invisible hand, in predominantly the Cloud private sector, has unleashed new possibilities and innovative services, delivering social benefits, creating new markets or disrupting existing industries.”4

But what if road cars were shaped differently? What if, rather than becoming draggy and unstable with speed, family sedans became more stable, the invisible hand of the air pressing them to the tarmac rather than prying them loose?”

“In the eyes of some conservative commentators, the invisible hand of liberals operated behind the powerful Hurricane Matthew, a climate phenomenon that triggered a massive evacuation on the east coast of Florida as had not been experienced in over a decade.Limbaugh is right when stating all these, but he skipped one little detail: Hurricane Sandy.Some of Trump’s conservative supporters, though, couldn’t wait to wade in and proffer their “theories” on a devastating weather event they believe is a hoax.”

“As with his previous run for council in 2014, Lavarre is seeking an overhaul of business regulations. “The key is to reduce limitations, regulations, excessive rules, and taxes. If you reduce the burden on merchants, you’ll have more who will thrive under the invisible hand of capitalism.”

"Government, after all, is supposed to be “the invisible hand,” not an overlord imposing burdensome regulations that prevent businesses from being successful. A competitive marketplace is nearly as important to free society as democracy itself. Just as we are vigilant in protecting our rights under the Constitution, we also must protect economic competition.

Friday, October 14, 2016

LOONY TUNES no. 178

1

Tyler Cowen, a Bloomberg View columnist, and professor of economics at George Mason University, posts and writes for the blog Marginal Revolution. His books include “Average Is Over: Powering America Beyond the Age of the Great Stagnation.” posts HERE

Puzzled About Republicans and Trump? Game Theory Helps”

“In “other words, the Republicans have been on the wrong side of game-theory logic twice, first in delaying their opposition and then later in enacting it. Those are hardly examples of getting Adam Smith’s “invisible hand” metaphor to work in their favor.”

“Brewster’s, foodies, aspiring game designers, digital animators and chefs have been served by the partnership between FSU and GRCC for 25 years. What the next 25 will bring only the invisible hand of the market will reveal, hopefully no terminators, but if it terminates as well as Art and Bev’s makes a burger I am sure it will be a painless affair.”

COMMENT

Congratulations on your 25 years.

But forget what the “the invisible hand of the market will reveal”. It will reveal nothing. It doesn’t exist. Adam Smith never said it did. Modern economists, like Paul Samuelson, promoted the false idea from misreading Adam Smith from 1948 in the first edition of his highly successful textbook, Economics, and its following 19 editions.

What the market will bring over the bext 25 years is an account of markets based on their VISIBLE prices - no market can work without visible prices - that’s all we need.